By Tiernan Ray

Pacific Crest’s Michael McConnell today reiterates a Sector Perform rating on shares of Nvidia (NVDA), after trimming next fiscal year’s estimates for the company’s Tegra chip to reflect his view the company has lost the business for Google‘s (GOOG) next version of its “Nexus 7” tablet computer running the Android operating system.

“Supply chain conversations indicate two reasons for Google’s se- lection of the Snapdragon APQ8064 over Tegra 4: (1) competitive pricing and (2) a decision to single-source the application processor and 3G/4G modem to simplify logistics and create a fully pin-compatible platform interface.”

McConnell’s colleague, Evan Wilson, who follows Google, estimates the company may ship (sell in) 10 million units of the next Nexus 7 from next quarter through Q1 of 2014, a jump of 61%.

At an average price of $20 to $25 per Tegra processor, that’s an “adverse revenue impact of $200 million to $250 million” to Nvidia, McConnell estimates.

Hence, he cut his Tegra sales estimate for the fiscal year ending next January to $525 million from what had been $750 million.

McConnell, however, also sees better prospects for the workstation market and raised his estimate for the company’s “Quadro” processors there:

We have increased our Quadro workstation sales estimate to $897 million (8% y/y growth) versus a prior estimate of $857 million (3% y/y growth). Given the high operating profit of the Quadro product line (46% operating margin), this provides an estimated $0.05 of EPS benefit to our model in fiscal 2014.

His full-year 2014 estimate goes to $4.3 billion in revenue and 80 cents in profit per share from a prior $4.47 billion and 90 cents per share.

As for what to do with the stock, McConnell thinks there’s an “opportunity cost” despite the cheap valuation:

NVDA is only up 1.5% year to date versus 9.5% appreciation in the SOXX, and declined 11.5% in 2012 versus a 5.4% y/y rise in the SOXX. While value investors will point to limited downside in the stock given the company’s large cash position ($5.46 cash per share), the opportunity cost to investors appears to be increasing given the likelihood for a Tegra sales decline this year, limited headroom for further GPU share gains, and high operating expenses (39% of sales).

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There are 11 comments

FEBRUARY 6, 2013 11:48 A.M.

Max wrote:

Hey, TR. This is utter hogwash, and what you are witnessing is the "End Game" for the shorts in NVDA. Whether this guy is complicit in getting the stock down over 3% in the pre-market, or not, today's action is a Classic "Bear Raid". Having been in this business for over 35 years, I've seen this many times. What the shorts will do is have small amounts of the stock in a long account and much larger amounts short. So, for instance, what happened, today, is that they sold 50-100k shares in the pre-market, got the stock down 3% and then covered 5mm plus shares lower. The loss on selling the long shares is tiny compared with what they got back covering at lower prices, early.
The HUGE volume, for this time of day, added to the recovery to down only 1/2%, now, is proof positive that this was nothing more than a manipulation to allow the shorts to cover and possibly go long before earnings. I won't be surprised if the stock actually finishes "unched" to up on the day. As always, we'll know in the fullness of time, but you heard it here, first...;)
Best,
Max

FEBRUARY 6, 2013 11:54 A.M.

Anonymous wrote:

I see you haven't been in your own business ever. A company doesn't start manufacturing large quantity of an item if there is no buyers. If there is only one buyer they possibly have to commit for certain amount.in cost.

FEBRUARY 6, 2013 12:41 P.M.

Josh Pritchard wrote:

He cuts his Tegra revenue estimates by $225M, but his estimate for the company's total revenue for the year dropped $170M. Does the full report explain where the $55M is coming from relative to his previous estimates, if Tegra is indeed losing $225M in rev from Asus/Google?

Isn't it also "weird" to REITERATE the same rating while slashing his estimates? Is that acknolwedgement that he should have had a higher rating before revising his estimates?

FEBRUARY 6, 2013 12:50 P.M.

roundhouse_c wrote:

Nvidia has also stated that they had more design wins for Tegra 4 then they had for Tegra 3 at CES, it was stated in their slide presentation. So even IF it were true that we lost the Google Nexus 7 Part 2, we still have other design wins that McConnell apparently knows nothing about . ., we'll see.

FEBRUARY 6, 2013 1:04 P.M.

Tiernan Ray wrote:

Josh: McConnell also raised his 2015 estimate for the Quadro workstation product by about $40 million. I've updated the post to reflect that.

FEBRUARY 6, 2013 1:04 P.M.

Tiernan Ray wrote:

Max: Okay, I heard it here first...

FEBRUARY 6, 2013 1:34 P.M.

Josh Pritchard wrote:

Tiernen, thank you for the added information. That makes more sense.

FEBRUARY 6, 2013 2:21 P.M.

Anonymous wrote:

Specs have already been leaked for the Nexus 7.7 - Tegra 4 will be there, not Snapdragon. Pretty sure Max has it right as to what the motivation is for an article like this.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.